Posts in Institutions

The issue of wildlife breeding raises many interesting questions and concerns. To what extent is breeding intervention a legitimate wildlife conservation tool? Are wildlife breeders interfering with nature and to what extent is this justified? To what extent can we condone modern techniques of genetic manipulation and even potential de-extinction of species using emergent DNA technologies? All these issues revolve around questions of ‘wildness’ and traditional views of conservation, which are increasingly being challenged by the circumstances of the Anthropocene era, in which human activity dominates over nature.

Alexander van der Byl may have been South Africa’s first effective wildlife breeder. In 1837, he enclosed an area of around 6,000 acres on his farm ‘Nacht Wacht’ near Bredasdorp to protect a herd of 27 bontebok. Without Mr. van der Byl’s intervention the bontebok would most likely have followed the fate of the blaubok to extinction – the latter species, a smaller relative of the roan and sable antelopes, was exterminated by hunters in the late Eighteenth Century in its natural range in the South-Western Cape.

Two other South African examples of species that were reduced to a single population are the Cape mountain zebra and the southern white rhino. In both instances they were initially confined to a single protected area in which their numbers could increase through natural breeding, but subsequent expansions relied on a more strategic approach to establish new genetically viable founder populations in additional areas of suitable natural habitat. Examples include Przewalski’s horse, Père-David’s deer, the American bison, and the Arabian oryx.

Whereas wildlife breeding such as van der Byl’s bontebok initiative and white rhino protection in the Hluhluwe-Umfolozi Park may have started as a passive activity, the gradual emergence of new technologies that allowed sedation, translocation and other genetic and veterinary interventions has led to an increasingly sophisticated suite of options.

Dr. Mark Stanley Price is the former chair of the IUCN’s Reintroductions Specialist Group and played a key role in returning the Arabian oryx to the wild. A recent thought-provoking article he co-authored with David Mallon in the journal Oryx entitled ‘Fall of the Wild’ argues that most animal populations today are subject to some form of human intervention and that rather than question whether they are ‘wild’ it makes more sense to consider simply whether they are ‘lightly’ or ‘intensively’ managed. According to Yolan Friedmann, CEO of the Endangered Wildlife Trust, many large mammal species in South Africa effectively exist under fairly intensive management, especially those that are rare and endangered.

Mallon and Stanley Price point out that the question of wildness is not just of theoretical interest, but has practical implications for international agreements such as CITES and the Convention on Biological Diversity, as well as for meeting objectives under national legislation and monitoring by, for example, the IUCN’s Red List. Citing the example of the Arabian oryx, they note that it has been upgraded from ‘extinct’ in the 1970s to merely ‘vulnerable’ in 2011, but that this has drawn criticism, as most animals now survive in fenced enclosures under active management. They share Friedmann’s observation that most South African wildlife ranching takes place in fenced enclosures and note that regarding these situations as ‘non-wild’ would have massive implications for Red-list assessments – requiring some significant changes to existing records.

The spectacular growth of South African game numbers since the 1960s is well documented, including the recovery of threatened species such as white rhino, black wildebeest, roan and sable antelope – largely thanks to the efforts of private breeders. Apart from the issue of enclosure, further concerns to conservationists relate to the use of non-native subspecies (e.g. roan and sable from other parts of Africa) and the introduction of species such as nyala and blesbok to areas outside their historical range.

This question is especially relevant in Africa, where projected forecasts of human population and economic growth – coupled with needs of food security – suggest that the pressure on wildlife will only intensify. It is also instructive to look at examples of North African antelope species such as the addax, dama gazelle, and scimitar oryx – the “three amigos”. Researching their historical fate in their home ranges in North Africa, one finds that they were mostly exterminated for food by hungry locals during times of civic unrest. Ex situ commercial breeding for trophy hunting in Texas has provided a hedge against extinction for these species, and provides a possible source for re-introduction.

White rhinos are being bred in China and there are proposals to move animals to Australia for breeding and safe-keeping. Does this make more conservation sense than applying further intensive and assisted breeding strategies within South Africa? To what extent can we accept that motivations for breeding are not based solely on pure ‘conservation’ goals, but also the commercial potential of tourism viewing, trophy hunting, and production of commodities such as rhino horn?

Opinions on such questions will vary widely between animal welfarists, conservationists and commercial wildlife breeders, but there is no doubt that wildlife breeding will continue to play a vital role in both species conservation and the broader South African land-use economy.

The late Ronald Coase is widely recognized for two hugely influential papers that revolutionized the way that economists and lawyers think about the world. The first was his work on the reason that individuals come together to form firms. The second was his equally famous work on what he called “social cost.” The conventional wisdom about that paper is that Coase wanted us to focus on how externalities could be better handled by private parties negotiating between themselves rather than the authority of a central government imposing a solution. George Stigler in fact coined the phrase “Coase Theorem,” which described the basic tenets of Coase’s work on the matter—that regardless of the initial allocation of property rights, individual bargaining about externalities is more efficient than government regulation when there are no transaction costs.

In plain English this means that in a hypothetical dispute between two individuals regarding the exercise of their property rights, it is “better” (i.e., economically efficient) if they bargain for a solution—as long as the bargaining is not fouled up by poorly defined rights, political meddling, or an extremely costly bargaining process. However, all of this has led the economics profession to focus primarily on the concept of externalities, not on the bargaining.

In a PERC conference beginning today, co-sponsored by the Liberty Fund, Inc., we suggest a significant departure from this perspective. Focusing on the externality takes us away from the liberty and responsibility that individuals have to work out problems without government intervention. Property rights that are clearly defined would, both theoretically and practically, do a much better job of working out disputes between property holders than the specter of constant government intervention and regulation. Liberty is better served by the bargaining and negotiations that private actors should be obliged and motivated to try in the vast majority of disputes. If the field of economics could be persuaded that the key point is not the externality, but the fact that bargaining would prevent almost everything that economists call an externality, it would go a long way towards promoting a free and responsible society and research that focuses on the importance of markets and freedom.

In this conference we will review the history of externalities starting with A.C. Pigou. We will then examine some of the applications that widely influenced later thinking on the matter, most notably Paul Samuelson’s textbook. Next we will look at Coase, the “revision” of the history and meaning of Coase by Stigler. We will then examine some of the practical applications that focus on bargaining as compared to externalities to illustrate the widespread advantages of emphasizing bargaining as the main vehicle to deal with disputes as compared to focusing on the externalities and the role of the state.

There are several questions we will consider: What exactly did Coase say? It was, after all, George Stigler, not Coase, who coined the phrase “Coase Theorem,” and Coase himself was apparently uncomfortable with the use of the phrase for much of his life. How does the general conception of the Coase Theorem differ from Coase’s actual work? How critical is Coase to our current debates about liberty, limited governments, and free markets today? What are the policy implications of focusing on externalities? What are the policy implications of a property rights approach?

We welcome readers’ thoughts on these questions below. For more on the legacy of Ronald Coase, see PERC’s Q&A with Steven Medema on the Coase Theorem in environmental economics.

What's ahead for global energy markets? How will the U.S. shale revolution affect our energy future? To find out, we asked Stephen Arbogast, an expert with more than thirty years of experience in finance working with the energy sector. As Prof. Arbogast explains, when it comes to global energy markets, the next decade will look very different from the last four decades.

Stephen Arbogast is an Executive Professor of Finance at the C.T. Bauer College of Business, University of Houston. In that capacity, he has authored more than 70 case studies on technical and economic aspects of the energy business. He is also the author of the book Resisting Corporate Corruption, now in its second edition. Prof. Arbogast has taught in graduate MBA programs since 1987 and was awarded the Bauer College Payne Teaching Excellence Award in 2008.

We thank Prof. Arbogast for taking the time to answer our questions. For more PERC Q&As, visit the series archive.

Q: You’ve said that when it comes to the geopolitics of energy, the next decade could look quite different than the last four decades. What do you mean by that?

A: The last four decades have been dominated by the operations of the OPEC cartel. With only occasional exceptions, this cartel has determined the general price level for crude oil. This price represents roughly two-thirds of the price of final products to consumers, so it is most consequential for the cost of energy in developed economies. The next decade could be different for two reasons. The first is the shale revolution. Right now, that revolution—unlocking oil and gas from tight rock formations—is catapulting the U.S. back to a position of world’s leading oil producer. What is not known is the extent to which this will spread to other lands. Many non-OPEC countries, including China, have vast shale resources. To the extent production surges outside of OPEC, the cartel’s dominance will certainly decline.

The second issue is more ominous and concerns a key OPEC member, Saudi Arabia. For decades the Saudis have operated as OPEC’s flywheel, absorbing production cuts in times of glut and expanding production to combat scarcity. Will Saudi Arabia remain much as it has been in the years ahead? Will it still be ruled by the extensive Royal House of Saud? One looks at Syria, Egypt, Iraq, Libya, and Iran and wonders.

Q: How has OPEC shaped oil politics in the past, and where are we headed?

A: In 1973, OPEC discovered it could dictate the short-term price of crude oil. The cartel saw that developed nation oil demand is quite inelastic over the near term. This means the cartel could and did dictate price to its customers. The result then was a 400% price increase that brought to the OECD nations. Over time, the cartel also learned that abrupt price hikes sow seeds of reversion. Price hikes to $40/b in 1980 led to a demand bust and price collapse below $10/b in 1986.

These experiences led OPEC, under Saudi leadership, to a price targeting strategy. The cartel seeks prices which balance several objectives. First, they must be high enough to generate current revenue to fund the political models in these states. These political models concentrate wealth in the state and purchase political support with generous handouts and subsidies. Second, the prices should not be so high that they trigger demand destruction undermining the price level’s foundation. Finally, they also should not encourage sustained efforts to replace petroleum with alternative fuels.

Surveying the history of price levels since 1973, it must be conceded that OPEC largely achieved these objectives. No alternative fuels “silver bullet” has emerged. Demand for petroleum has grown and most forecasts show it growing for decades to come. Only the shale revolution and regional political stability raise the possibility of shaking the cartel’s grip on the energy price.

Q: What role does Saudi Arabia play?

A: Saudi Arabia plays the role of “swing producer” within the cartel. This means the Saudi’s reduce production in times of glut and increase it during moments of peak demand. Cartels generally require some member willing to play this role—otherwise supply and demand excesses will drive prices to cyclical peaks and troughs.

The Saudis have unique characteristics that, alone among OPEC members, allow them to play this role. First, they possess huge oil reserves, estimated to exceed 200 billion barrels. This allows the Saudis to add production capability and maintain the spare capacity needed to cushion demand peaks. Second, the Saudi have a small population. Until recently that population did not exceed 20 million. This meant that the Kingdom could amass large financial reserves during periods of peak demand and prices. These reserves could then be drawn upon to fund domestic spending when slack demand required the Kingdom to cut production.

It is not as clear going forward that the Saudis will be able to play this same role. Despite their ample reserves, the Saudis seem to be having difficulty increasing production capacity beyond 12 million barrels per day. Much of their “spare” is less desirable medium and heavy crude that encounters refining bottlenecks during demand peaks. Meanwhile, a larger, more subsidized population has raised the cost of preserving social peace. Indeed, one can detect elements of domestic concern in the current Saudi hard line towards Syria and Iran.

All this said, the graveyards are full of people who prematurely forecast the demise of the House of Saud. The shale revolution, ironically, could pose more of a threat than disturbances among their neighbors if it undermines the crude price and pinches the Saudi paternalistic ruling model.

Q: We’ve seen a number of sharp peaks and troughs in oil prices over the last few decades. How much of a role does OPEC play in driving or moderating these changes?

A: The answer here is a bit unconventional. OPEC has usually been divided into price hawks and a more moderate, long-term optimizing group. Before 1980, Iran and Libya led the hawkish group. During this period, they repeatedly succeeded in driving prices to peaks well beyond those envisioned by the more moderate, Saudi-led group. Between 1980 and 1985, a major showdown took place between the two factions. This climaxed with the Saudis flooding the market with production, leading to the price bust of 1986. Since then, Saudi price policy has largely reined. The cartel has effectively managed prices when its spare capacity lies within 3-6 mb/d. Since 1986, price booms and busts have largely resulted from demand “surprises” that moved cartel spare outside of this range. The Asian crisis of 1997 produced a demand bust that toppled crude prices in 1998-99. China’s stupendous demand growth then fueled a demand peak that led to record prices in 2008. The Saudis have tried to reinforce their capacity to manage demand by adding new production capacity. There are, however, widespread doubts as to whether the Saudis can expand beyond the present 12 mb/d level.

Q: What influence does OPEC’s price umbrella have on oil development throughout the world? What are its implications for North American energy development?

A: Somewhat perversely, it means that higher cost oil gets developed first. Much OPEC oil is very low cost. In particular, the reserves in Saudi Arabia, Iran, Iraq and Libya are easy to develop – largely onshore drilling of already discovered fields. Political constraints of various sorts, including war and civil unrest, combine with OPEC policy to prevent their development. Meanwhile, the international oil industry busies itself developing much higher cost oil in politically safer locations – tar sands in Canada and “pre-Salt” finds in deep water Gulf of Mexico. A single well in this later location can cost well over $100 million to drill. The average cost of production for tar sands, including a return on capital, is probably in the $65/b range

The implications for North America are interesting. The OPEC price umbrella has ultimately paved the way for North America to become self-sufficient. Both the Canadian tar sands and the shale oil production are economic at $80/b and higher. Assuming current price levels remain in place, North America’s economies should need no crude oil imports by 2020.

Q: What about unconventional energy sources? How do global markets affect these energy sources?

A: Global prices determine whether these resources can be economically developed. The answer today for tar sands and shale oil is yes.

Logistics enter the picture at this point. One fascinating, recurring story in the energy business is that new oil and gas keeps showing up in unexpected places. Then it becomes imperative to put logistics in place to get the new production to market. Nobody expected new oil and gas production in places like Pennsylvania and Ohio. Similarly, little infrastructure existed in the Bakken and Eagle Ford basins; much of that in the Permian basin of West Texas was old or ran in the wrong direction. Pipelines adequate for new Canadian tar sands production don’t exist. These logistical bottlenecks suppress production for a time and depress current prices. This is the reason why West Texas Intermediate, the main U.S. benchmark crude, has carried a $5-15/b discount versus international prices for the past several years. Over time these logistical bottlenecks will be removed and the price discrepancies will disappear.

However, these kinds of infrastructure constraints will be big issues for other countries with shale oil and gas reserves. Here we are talking about countries as diverse as China and the Ukraine. There is vast potential elsewhere in terms of what’s geologically under the earth. In terms of infrastructure, however, these lands are way behind where the U.S. was as the shale revolution began. Together with other limitations, their inadequate infrastructures will delay the shale revolution from spreading globally.

Last we must say a word about shale gas. It is different from oil in that it is much harder to transport internationally. Liquefying the gas into LNG is the principal means, but this requires huge capital, massive facilities, and special ships. Those only get built when there are firm buyers and long-term contracts. Without these, new gas can be “stranded”—discovered but left in the ground. That is the story today with much U.S. shale gas. It needs export permits to find overseas LNG markets, but the Obama administration has been “slow walking” these approvals for various reasons.

Shale gas developed overseas, say in China and the Ukraine, should find immediate uses in power, heating, and manufacturing. These countries are energy importers and use copious quantities of coal that can be replaced.

Q: What are the environmental implications of foreign vs. domestic energy production?

A: This is a tricky business. Domestic U.S. energy production increases the environmental impacts within the physical U.S. However, these efforts are intensively regulated. Even allowing for a major failure like the Deepwater Horizon, from a global perspective, energy operations in the U.S. will be safer and more environmentally sound than in many other energy producing locations. Globally, it’s better to have more production in the U.S. and less in China, Nigeria, or Angola. But, that will not satisfy the NIMBY crowds within our ranks.

Q: What impact will the U.S. shale revolution have on global energy markets and on the U.S. economy?

A: The shale revolution is an enormous breakthrough, but it needs to be carefully understood. Let me outline three key points.

First, we are at the beginning of understanding this revolution. There is much we do not know. We don’t know how much “source rock” can be exploited worldwide in this way. In other words, we can’t yet estimate the total amount of additional oil and gas reserves now available through fracking and horizontal drilling. In addition, we don’t yet have a finished exploitation technology. Service companies and producers continue improving their methods. For example, some companies are fracking in the Eagle Ford without using water. All of these improvements mean that we don’t yet know the lowest production costs feasible for shale production. Obviously, the lower these costs and more flexible the methods, the more reserves can be exploited worldwide.

The second point is that the shale revolution poses major policy challenges for many countries. The U.S. is in many ways “lucky” in that it has unique conditions conducive to shale development. In the U.S., private landowners own the mineral rights on their land. They can lease these to developers without having to get an approval from Washington. Also, regulatory activity is largely at the state level. The U.S. is fortunate to have a collection of states friendly to oil and gas production. Texas, Oklahoma, Louisiana, and Arkansas all gave immediate blessings to shale development. One only needs to look at Pennsylvania and New York to seek how different attitudes on this can be. The former is merrily supporting development and harvesting huge economic and fiscal benefits. The latter is happily preserving the quiet economic destitution of the western part of the state. It’s about these kinds of choices, but in the U.S. with its federal system, we are blessed with the opportunity to have different choices made in different places. Other countries are not so fortunate. Whether you are talking about China or the U.K., the central government controls the mineral rights. Local communities see no benefit from the inconveniences of development, and so are largely united in opposition. How these governments will change their current arrangements to share benefits with the local communities is a policy issue. Most of these policy choices have yet to be made.

Collectively these points mean that the U.S. is soaring ahead of everywhere else in shale development. This is bringing fantastic benefits to the U.S. economy, in no small part because the slowness of response elsewhere means the U.S. can go full-bore ahead without collapsing the price structure.If everybody was climbing aboard the shale revolution, prices would probably crater – dropping below that needed to support new drilling. If everyone started drilling for shale oil right away, we’d probably see $60/b oil that would stay there for some time.

Because this is not happening, U.S. shale development can proceed to deliver both good returns to developers and stable prices to consumers – indeed some of the recent price moderation drivers are seeing at the pump is due to the bounty of light crude coming out of U.S. shale production. The benefits hardly stop there. State treasuries are being replenished. The federal government is drawing increasing revenue and royalties from production on federal lands. Cheap gas has reinvigorated energy-intensive manufacturing in the U.S. The number of new chemical plants announced and under construction is staggering. Our balance of payments benefits greatly. Oil imports are down sharply while exports of refined products, chemicals, and natural gas grow rapidly. Abundant natural gas is displacing environmentally dirty coal in power generation. Lastly, we have gained more protection and freedom of action in the national security arena. Physically our economy will not be touched by embargoes or outages in the Middle East, though prices will still be impacted. Plentiful gas gives us diversification options to cut exposure to global oil events further.

This brings us to the last point. We need to think of this revolution as a reprieve, not a permanent reversal. However abundant the shale reserves, they are still finite and subject to depletion. This means the search for other, renewable sources of energy must continue. When oil prices busted in the 1980s, much research into alternative fuels was abandoned. When efforts resumed around 2006, the research experts were long gone. This boom and bust cycle in energy research should not be repeated. Building subsidized industries that cannot compete under current prices is not desirable, but continuing to prepare for tighter supplies and higher prices down the road should be a good national investment.

The existence of “externalities” — effects (costs or benefits) of market transactions that are not experienced by those involved in the transaction, but are instead experienced by others, those “external” to the transaction — is routinely proffered as a justification for governmental regulation of private economic activity. Ronald Coase had a different view, however. In his seminal essay, “The Problem of Social Cost,” Coase never used the term — and with good reason. In Coase’s view, the word “externality” did not do much work. In his introduction to The Firm, The Market, and the Law, Coase wrote:

the existence of “externalities” does not imply that there is a prima facie case for government intervention, if by this statement is meant that, when we find “externalities,” there is a presumption that governmental intervention (taxation or regulation) is called for rather than the other courses of action which could be taken (including inaction, the abandonment of earlier governmental action, or the facilitating of market transactions). . . .

. . . it is easy to show that the mere existence of “externalities” does not, in itself, provide any reason for governmental intervention. Indeed, the fact that there are transaction costs and that they are large implies that many effects of people’s actions will not be covered by market transactions. Consequently, “externalities” will be ubiquitous. The fact that governmental intervention also has its costs makes it very likely that most “externalities” should be allowed to continue if the value of production is to be maximized. This conclusion is strengthened if we assume that the government is not like Pigou’s ideal but is more like his normal public authority–ignorant, subject to pressure, and corrupt. Whether there is a presumption, when we observe an “externality,” that governmental intervention is desirable, depends on the cost conditions in the economy concerned. We can imagine cost conditions in which this presumption would be correct and also those in which it would not. It is wrong to claim that economic theory establishes such a presumption. What we are dealing with is a factual question. The ubiquitous nature of “externalities” suggests to me that there is a prima facie case against intervention, and the studies on the effects of regulation which have been made in recent years in the United States, ranging from agriculture to zoning, which indicate that regulation has commonly made matters worse, lend support to this view.

The concept of “externality” has come to play a central role in welfare economics, with results which have been wholly unfortunate. There are, without question, effects of their actions on others (and even on themselves) which people making decisions do not take into account. But, as employed today, the term carries with it the connotation that when “externalities” are found, steps should be taken by the government to eliminate them. As already indicated, the only reason individuals and private organizations do not eliminate them is that the gain from doing so would be offset by what would be lost (including the costs of making the arrangements necessary to bring about this result). If with governmental intervention the losses also exceed the gains from eliminating the “externality,” it is obviously desirable that it should remain.

(pp. 24-26)

As Coase notes, this was one of the points he sought to make in “The Problem of Social Cost,” and yet it is a point many seem to have missed. Coase’s essay is routinely cited for the proposition that the existence of “externalities” justifies governmental intervention, when Coase suggested nothing of the sort. Rather, the case for governmental intervention is made by showing that such intervention is likely to make things better — something that must be shown, and not merely assumed.

I now turn to that other article cited by the Swedish Academy, The Problem of Social Cost, published some 30 years ago. I will not say much here about its influence on legal scholarship which has been immense but will mainly consider its influence on economics, which has not been immense, although I believe that in time it will be. It is my view that the approach used in that article will ultimately transform the structure of microeconomics – and I will explain why. I should add that in writing this article I had no such general aim in mind. I thought that I was exposing the weaknesses of Pigou’s analysis of the divergence between private and social products, an analysis generally accepted by economists, and that was all. It was only later, and in part as a result of conversations with Steven Cheung in the 1960s that I came to see the general significance for economic theory of what I had written in that article and also to see more clearly what questions needed to be further investigated.

Pigou’s conclusion and that of most economists using standard economic theory was, and perhaps still is, that some kind of government action (usually the imposition of taxes) was required to restrain those whose actions had harmful effects on others, often termed negative externalities. What I showed in that article, as I thought, was that in a regime of zero transaction costs, an assumption of standard economic theory, negotiations between the parties would lead to those arrangements being made which would maximise wealth and this irrespective of the initial assignment of rights. This is the infamous Coase Theorem, named and formulated by Stigler, although it is based on work of mine. Stigler argues that the Coase Theorem follows from the standard assumptions of economic theory. Its logic cannot be questioned, only its domain. I do not disagree with Stigler. However, I tend to regard the Coase Theorem as a stepping stone on the way to an analysis of an economy with positive transaction costs. The significance to me of the Coase Theorem is that it undermines the Pigovian system. Since standard economic theory assumes transaction costs to be zero, the Coase Theorem demonstrates that the Pigovian solutions are unnecessary in these circumstances. Of course, it does not imply, when transaction costs are positive, that government actions (such as government operation, regulation or taxation, including subsidies) could not produce a better result than relying on negotiations between individuals in the market. Whether this would be so could be discovered not by studying imaginary governments but what real governments actually do. My conclusion; let us study the world of positive transaction costs.

If we move from a regime of zero transaction costs to one of positive transaction costs, what becomes immediately clear is the crucial importance of the legal system in this new world. I explained inThe Problem of Social Cost that what are traded on the market are not, as is often supposed by economists, physical entities but the rights to perform certain actions and the rights which individuals possess are established by the legal system. While we can imagine in the hypothetical world of zero transaction costs that the parties to an exchange would negotiate to change any provision of the law which prevents them from taking whatever steps are required to increase the value of production, in the real world of positive transaction costs such a procedure would be extremely costly, and would make unprofitable, even where it was allowed, a great deal of such contracting around the law. Because of this, the rights which individuals possess, with their duties and privileges, will be, to a large extent what the law determines. As a result the legal system will have a profound effect on the working of the economic system and may in certain respects be said to control it. It is obviously desirable that these rights should be assigned to those who can use them most productively and with incentives that lead them to do so and that, to discover and maintain such a distribution of rights, the costs of their transference should be low, through clarity in the law and by making the legal requirements for such transfers less onerous. Since this can come about only if there is an appropriate system of property rights, and they are enforced, it is easy to understand why so many academic lawyers (at least in the United States) have found so attractive the task of uncovering the character of such a property rights system and why the subject of “law and economics” has flourished in American law schools. Indeed, work is going forward at such a pace that I do not consider it over-optimistic to believe that the main outlines of the subject will be drawn within five or ten years.

James M. Buchanan, the Nobel laureate in economics and father of public choice theory, has passed away at the age of 93. Buchanan's influence on PERC and free market environmentalism has deep roots, and formed the foundation for PERC's early work on environmental issues.

As Buchanan was fond of saying, public choice theory is "politics without romance." Public choice applies standard economic models of rational decision making to participants in the public sphere, such as politicians, policymakers, and voters. The result has been a transformation of how economists and political scientists view the world.

The first, and I believe, most important book I read in graduate school was James Buchanan’s Freedom in Constitutional Contract: Perspectives of a Political Economist. My undergraduate education was in behavioral political science and I went to graduate school planning to study public opinion polling. But then I read Freedom in Constitutional Contract, which completely redirected my graduate education. By the time I defended my dissertation, I had been baptized and confirmed into Virginia public choice.

One of the first and most important things I learned from Buchanan is that studying choice should not be the purpose of economics at all. On page 25, he explained:

"I have often argued that there is only one principle in economics that is worth stressing, and that the economists’ didactic function is one of conveying some understanding of this principle to the public at large. Apart from this principle there would be no basis for general public support for economics as a legitimate academic discipline, no place for economics as an appropriate part of a liberal education. I refer, of course, to the principle of the spontaneous order of the market, which was the great intellectual discovery of the eighteenth century."

The principle of spontaneous order in the market is the basis of free market environmentalism. It is the core of PERC’s Enviropreneur programs. I continue to be amazed at the orders that arise around us.

I am grateful to Jim Buchanan for reorienting my intellectual journey. I am grateful for PERC inviting me as a young professor to conferences where I got to know Jim. He and I even played horseshoes on a Fourth of July at a PERC conference. I think he won.

The collected works of James Buchanan can be read online at the Library of Economics and Liberty. The video below has more on Buchanan's life and legacy:

This week at PERC, we begin a colloquium exploring the role of property rights and liberty in Native American history. The program will focus on the historical emergence of property rights and will then explore the role of property rights in Native American history and in the early West.

David Haddock, senior fellow at PERC and law and economics professor at Northwestern University, is a colloquium participant and author of the article "An Untrustworthy Trustee" in the latest edition of PERC Reports. The article, reprinted below, discusses the trustee relationship between tribes and the U.S. government. As Haddock concludes, "it is well past time to hand management of trust assets over to the individuals who own them."

An adult may sell an asset carelessly for less than market price. The buyer has no obligation to warn in advance, augment the price later, or share the loss of misplaced receipts. No one expects young orphans to manage their assets, however—a task that a trustee assumes. If the trustee squanders an inheritance due to provable carelessness, an orphan cannot obtain compensation from buyers or sellers, but the law will force the trustee to bear the loss. This arrangement gives the trustee incentive to manage the assets as though they are his or her own.

After confining tribes to reservations, the government decided those people, like orphans, were incompetent, undertaking a trusteeship over important assets. From the outset, that trusteeship was very different from an ordinary trusteeship. Governments per se lack brains and thus have no intentions or plans, and cannot possibly be trustees. Instead, the government employs people to formulate what we euphemistically refer to as governmental intentions and plans. For each transaction, some human in the Interior Department’s Bureau of Indian Affairs (BIA) acts as the functional trustee. Many transactions aggregate the properties of many individual Indians, which vastly exceed the bureaucrat’s personal wealth. Furthermore, the decision maker is rarely identifiable and is immune to personal liability for even a tiny fraction of waste.

Instead, when an Indian obtains compensation for some anonymous BIA bureaucrat’s mismanagement, the government is responsible. Governments transfer income rather than create it, so the actual responsibility falls on taxpayers. The Treasury distributes tax receipts in literally millions of directions; a taxpayer can track only a few expenditures, and few citizens make Indian affairs their priority. In theory, Indians remain incompetent to manage many of their most valuable assets: In reality, taxpayers are incompetent to supervise the BIA’s handling of that job. BIA bureaucrats thus behave as a trustee in both directions—obliged to manage Indian property carefully and to manage taxpayer money carefully—but bear little traceable personal responsibility in either direction. Chronic mismanagement has been an unavoidable curse ever since the War Department began handling Indian affairs in the early 1800s.

A series of suits, all including Cobell in their names, commenced in 1994 when Congress transferred management of Indian trust assets to a new Office of the Special Trustee. An audit discovered massive gaps and errors in records that should have tracked receipts since the nineteenth century. Despite repeated court orders, the Department of Interior could not rectify the shortcoming, making it impossible to know whether the BIA had even received all royalty payments stipulated by leases. Clearly little money had found its way to the Indian property owners, but nobody in the BIA acknowledges knowing where the rest went.

After 16 years of fruitless litigation, Congress concluded that a resolution in court would never be forthcoming. A bill allocated $3.4 billion to settle the Cobell claims once and for all. That is an average of $40 from each family across the nation, a painful penalty to pay for some bureaucrat’s negligence. Even so, less than half will go directly to the Indian property owners; the rest is to be administered by (you guessed it) the BIA—apparently the wages of failure are new opportunities to fail. Alas, the settlement is back in the courts; some closure!

Today, tribal members are literate and hold jobs in every sector of the economy. Whether or not Indians were competent to manage their own affairs in the nineteenth century, Cobell shows the BIA is incompetent for the job. It is well past time to hand management of trust assets over to the individuals who own them.

For more from PERC on Native American institutions, visit our research page.

Michael Arbuckle, a senior fisheries specialist at the World Bank, is visiting PERC this week to attend our workshop on "Tackling the Global Fisheries Challenges." Arbuckle is working with PERC's Donald Leal on rights-based fisheries reform in developing countries with an emphasis on artisanal fisheries. Watch the video interview above or read a more detailed interview below. For more PERC Q&As, visit the series archive.

Q: What do you see as the biggest challenge facing global fisheries?

A: It’s a tragedy that worldwide the wealth of fish is being squandered. More than 200 million people in developing countries depend on fisheries and aquaculture for their livelihood, and fish account for 50 percent of the protein needs for the 400 million poorest people.

Each year, poor governance costs the fishing industry at least $50 billion. Yet more than $100 billion of market gains are possible when sustainable net benefits are considered.

This is bad for American markets, but it is an even greater tragedy for developing countries where wealth is needed most. The global challenge is to help recover the lost wealth in developing country fisheries and reinvest it.

Q: What do you hope to accomplish with the PERC workshop on global fisheries challenges?

A: Forms of property rights are not well recognized in most developing countries. Furthermore, the capacity of governance or the rule of law is often weak or non-existent.

So Donald Leal and I have not just been looking into whether we need property rights or what are the characteristics of these property rights, but how do you introduce them. The development of property right institutions must come from the bottom up. The importance of property rights are further emphasized in this manner because they empower users to manage their resources responsibly.

Q: What are a few lessons we can learn from the bottom-up management approach to some of the fisheries you have been examining in the developing world?

A: Often bottom-up property right institutions are the only entry point for reform in such countries. We are seeing a growing list of examples including Mexico, Bangladesh, Indonesia, Chile, etc., where bottom-up property right arrangements have helped develop more stable fisheries.

We are learning more and more about the characteristics of such systems. We now know it’s dangerous and often counter productive to invest in value chain improvements without reliable property rights, but we also know that if property rights are established a variety of gains are possible.

In addition, we know that one size does not fit all and the particular arrangement of property rights is unique. This is something that must be considered as we take away lessons from successful property rights regimes—the misalignment of property rights to the political economy of the country can easily undermine the rights that are being established.

Q: What is your vision for the future of fisheries and aquaculture?

A: Looking to the future, the supply of fish will be dominated by aquaculture and this will be up for meeting future demand. It will be critical, therefore, to not see fisheries as an end in itself, but also as a foundation for aquaculture development.

An important objective for the World Bank and PERC is to help identify and implement the property right institutions that will enable such innovations in the oceans.

The PERC workshop on "Tackling the Global Fisheries Challenges" is a good opportunity to examine high seas property rights issues from a clean platform, without thinking about the current constraints of the institutions in place. The workshop gives the participants a chance to think about fisheries from a theoretical perspective, consider some specific examples, and think innovatively about how to move forward.

Denis and Barbara Prager fear the day that hydraulic fracturing takes place on their land in the Shields Valley of Montana. The threat of ‘fracking’ is real and there is nothing they can do. While the Prager’s own the surface rights to their property, the state owns the subsurface and mineral rights. The state has the right to use the land as is ‘reasonably necessary’ for drilling or can lease the mineral rights to a private company. Those rights are presently open for bid.

Hundreds of millions of acres of property across the nation have secure property rights that are split; different entities own the surface and subsurface rights. Battles over split estate rights emphasize the importance of well specified and defined rights. Perhaps most important is the knowledge of what rights the surface owner does and does not have.

Under split estate rules, subsurface owners have the right to use surface land as is ‘reasonably necessary’ to develop subsurface assets. Private oil and gas companies often lease rights from subsurface owners regardless of whether the estate is split or under single ownership. Either way, drilling and extraction companies are responsible for unnecessary harm done, impacting water quality, for example.

Though hydraulic fracturing has been going on for more than 60 years, it has gained recent attention due to its affordability in the current global economic and technological climate. It is interesting that while many environmentalists vie to decrease carbon emissions, they are also opposed to fracking. In truth, natural gas may be one of the greatest boons to keep America energized at low cost with fewer emissions. Given secure property rights and market transparency it can be environmentally friendly, to boot.

The physical world lost a great scholar last week with the passing of Elinor Ostrom, a 2009 Nobel Laureate. Ostrom left us with scholarly works that brought economic and property rights theory into the field. Why do we see the tragedy of the commons? When do we see it? And why, in some common resource pools, is it non-existent?

Ostrom’s work helped to organize many pieces of the environmental management puzzle. She demonstrated in various places across the globe that the tragedy is not necessary for common pool resources (CPRs) but is likely when at least informal rules do not exist.

There is no single solution to motivate long term environmental stewardship. In her 1990 book, Governing the Commons: The Evolution of Institutions for Collective Action, Ostrom notes that “[n]either the state nor the market is universally successful in enabling individuals to sustain long-term, productive use of natural resource systems.” Each CPR is much more particular. There is, however, a common framework to help understand why some CPRs are managed for long-term productive use while others are not. Cumulating the evidence and bringing these factors into view was one of Ostrom’s great contributions.

Examining multiple CPRs across the globe, Ostrom and associates designed a set of principles that helped predict resource stability. Provided these rights, at least informally, the CPR is more likely to be well stewarded.

I think of CPRs managed under these rights as managed commons. They have property rights, formal or informal, that provide the necessary incentives to steward and invest in the resource.

Elinor Ostrom will be greatly missed. Her spirit and great contributions to economics and the social sciences will forever remain with us. She has organized ideas about CPRs in a manner that will help increase consistency of future research. She has created a great platform of understanding from which much research will continue to flourish.

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Founded 30 years ago in Bozeman, Montana, PERC—the Property and Environment Research Center—is the nation’s oldest and largest institute dedicated to improving environmental quality through property rights and markets.

The goal of PERC’s programs is to fully realize the vision of establishing “PERC University,” where scholars, students, policy makers, and others convene to expand the applications of free market environmentalism.

PERC's fellowships share a common goal of exposing new scholars, students, journalists, and policy makers to free market environmentalism, as well as enable scholars already familiar with FME to explore new applications.